Banks pay interest on deposits for several reasons:
a. Attracting Depositors: Banks offer interest to make their savings accounts and other deposit products more appealing to customers. This competition for deposits helps them attract more funds from individuals and businesses.
b. Funding Loans: The money deposited in the bank is used to fund loans for other customers. By paying interest on deposits, banks can encourage people to keep their money with them, thereby increasing their ability to lend.
c. Encouraging Savings: By providing interest on deposits, banks promote the habit of saving among individuals and businesses. This is beneficial for the overall economy, as it helps create a culture of saving and financial planning.
d. Regulatory Requirements: Some banks may be required to maintain a certain level of deposits and reserves, and paying interest helps them to meet these regulatory standards while ensuring liquidity and stability in their operations.
These reasons together create an environment in which both the banks and depositors can benefit.